I. Streamlined Procedures for Well-Run Bank Holding Companies

Well-capitalized and well-managed bank holding companies may engage de novo in permissible nonbanking activities listed in Regulation Y without prior notice or approval. These companies may also acquire nonbanking companies engaged in such nonbanking activities and engage de novo in activities permitted by Order under streamlined procedures within twelve business days of filing if the acquisition does not exceed $7.5 billion on any individual acquisition or 15% of the holding company�s capital.

II. Well-Capitalized and Well-Managed Bank Holding Companies Defined

A well-capitalized bank holding company, for purposes of defining qualification for the streamlined procedure, is any bank holding company that:

• maintains a total risk-based capital ratio of 10.0% or greater and a Tier 1 risk-based capital ratio of 6.0% or greater on a consolidated basis both before and immediately following consummation of the proposal;

• maintains either a Tier 1 leverage ratio of 4.0% or greater or, if the bank holding company has a composite examination rating of 1 or has implemented the risk-based capital measure for market risk, a Tier 1 leverage ratio of 3.0% or greater on a consolidated basis both before and immediately following consummation of the proposal; and
  
• is not subject to any written agreement, order, capital directive, asset maintenance requirement, or prompt corrective action directive to meet or maintain a higher capital level for any capital measure.

A minimum leverage ratio was not established for a bank holding company to qualify for the streamlined procedures because the leverage ratio is an inexact measure in certain situations.

III. Foreign Banks

For purposes of determining qualification for the streamlined procedures for nonbanking proposals, U.S. branches and agencies of foreign banking organizations are considered banks and must meet the capital and managerial standards applicable to U.S. banks. Accordingly, the capital ratios of U.S. branches and agencies of foreign banking organizations are deemed to be the same as the capital level of the foreign banking organization. For purposes of determining whether the managerial definition is met, the final rule requires:

• the largest U.S. branch, agency or depository institution controlled by the foreign bank have received at least a "satisfactory" composite examination rating from its U.S. banking supervisor;
  
• U.S. branches, agencies and depository institutions representing at least 80% of the U.S. risk-weighted assets controlled by the foreign banking organization at such offices have received at least a "satisfactory" composite examination rating from the U.S. banking supervisors;
  
• the overall rating of the foreign banking organizations combined U.S. operations is at least "satisfactory";
  
• no branch, agency or depository institution may have received one of the two lowest composite ratings at its most recent examination.

IV. Brokerage and Trading Activities of Bank Holding Companies

• The laundry list of permissible nonbanking activities which are closely related to banking has been reorganized and revised. The majority of the restrictions previously imposed on bank holding companies have been removed. Permitted activities included on the list include, among others: 1) riskless principal transactions; 2) private placement services; 3) foreign exchange trading for a bank holding company�s own account; 4) employee benefits counseling; and 5) providing real estate settlement services.

• A nonbanking subsidiary may act as a Futures Commission Merchant regarding any exchange-traded futures contract and options on a futures contract based on a financial or nonfinancial commodity. The requirement that a bank holding company may not act as an FCM on any exchange unless the rules of the exchange have been reviewed by the Federal Reserve Board has been deleted. The final rules continue to require that a bank holding company conduct its FCM activities through a separately incorporated subsidiary. The final rules prohibit a parent bank holding company from guaranteeing or otherwise becoming liable to an exchange or clearinghouse for trades other than those conducted by the subsidiary for its own account or for the account of an affiliate.
  
• The final rules allow as a permissible activity the provision of clearing-only activities, without any restrictions. Accordingly, a clearing subsidiary may act as the primary or qualifying clearing member of a "local" or market maker. In addition, the requirement that a clearing subsidiary have a contractual right to decline to clear a trade that the subsidiary believed posed an unacceptable risk has been deleted. The rules contemplate that the Federal Reserve Board will develop supervisory guidance on management of risks involved in clearing-only activities.
  
• Bank holding companies may broadly invest as principal in derivatives on financial and nonfinancial commodities or index, provided: 1) the underlying asset is a permissible investment for state member banks, or 2) the derivative contract requires cash settlement, or 3) the derivative contract allows for assignment, termination or offset prior to expiration and the bank holding company makes every reasonable effort to avoid delivery.
  
• Bank holding companies may provide management consulting services regarding financial, economic, accounting or audit matters to any company.
  
• The final rules group together all investment and financial advisory activities and broadly permit acting as investment or financial advisor to any person, without restriction.
  
• Bank holding companies may provide retail customers with investment advice concerning derivatives transactions and provide discretionary investment advice regarding derivatives transactions to institutional or retail customers as an investment advisor, commodity trading advisor, or otherwise.
  
• The final rules permit securities brokerage services without distinguishing between discount and full-service brokerage activities.

V. Riskless Principal Transactions

The final rules allow riskless principal transactions subject only to:

• a prohibition on a bank holding company from using its riskless principal authority to sell bank-ineligible securities at the order of a customer who is the issuer or in a transaction in which the bank holding company has an agreement to place the securities of the issuer; and

• a prohibition on acting as a riskless principal in any transaction involving a bank-ineligible security for which the bank holding company or affiliate acts an underwriter (during the underwriting period and thirty days thereafter) or dealer.

If you have any questions regarding these changes, please contact Richard Horgan in the CME Audit Department at (312) 930-3238 or Stephen Szarmack in the CME Legal Department at (312) 648-5422.